Home Builders Brace for Post-Downgrade Drop

For home builders, the debt-ceiling debate and subsequent downgrade are like this summer’s oil spill.

That’s how Robert I. Toll, the outspoken chairman of luxury home builder Toll Brothers Inc., put it in an interview Tuesday.

“Are we going to see a drop because of a lack in confidence engendered by the market’s drop? Are we going to see canceled deposits or canceled agreements?” Mr. Toll asked. “It seems to me logical that we should have a drop.” (He declined to comment specifically on the company’s recent performance because the company is in a quiet period ahead of its next earnings announcement later this month.)

The nation’s home builders, like the stock market as a whole, have taken a beating in the wake of the debt-ceiling debate in Washington that led to Standard & Poor’s downgrade of U.S. debt Friday.

It’s too early to say whether the fallout in the equities markets will have a lasting impact on home-building companies, which are already limping through their fifth year of the downturn.

For now, the good news is that mortgage interest rates aren’t expected to spike anytime soon, according to to Stan Humphries, real-estate web site Zillow’s chief economist. Rising rates make homes less affordable, so any increase would raise concern. Currently, a 30-year-fixed mortgage rate is below 4.5%.

Builders say they’re more worried about consumer confidence. Americans are already jittery that the foreclosure crisis will depress home values even further.

Early Tuesday, Atlanta’s Beazer Homes USA Inc. reported a wider fiscal third-quarter loss compared with a year earlier as closings fell and revenue plunged, leaving some analysts concerned about the builder’s cash supply, which at $274.6 million, is “among the lowest in the industry” according to one analyst. The company, which replaced its chief executive in June, is concerned about the fallout from the markets having an adverse effect on new home sales.

“What I worry about is the pipeline,” Beazer’s Chief Executive Allan Merrill said in an earnings call. “Given that the sales cycle is eight-to-12 weeks, what I worry about is those people in the last week [who] are not starting that eight-to-12 week process” because of broader concerns about the economy.

That will weigh on the builders’ current quarter, possibly hurting plans to return to profitability this calendar year.

Ken Campbell, chief executive of Standard Pacific Corp. said the company is paying close attention to buyers in the closing process “reminding them that this is a long-term decision and they shouldn’t over-react to a short-term drop in the stock market.” Of course, when it comes to drama, builders might have a feeling of been there, done that.